Importance of Allocating Costs to the Correct Cost Center

Importance of Allocating Costs to the Correct Cost Center

The process of cost allocation often presents company’s with a myriad of challenges. In essence, it seems like a simple process: allocate a cost to its source, but when such allocation is done without a true understanding of the cost implications, the process loses its efficiency and leaves room for errors.

Challenges presented in cost allocation

The consolidation of costs into their cost components is flawed. There is no detailed understanding of costs associated with financial management. Costs are often consolidated into the following components: VAT, fixed, variable and one-of-a-kind costs that all get lumped together as one cost. Furthermore, suppliers often allocate the wrong services on the wrong invoices.

Cost allocation is often a non-core process within a company. Little focus is placed on the tasks associated with allocating costs. Someone within the company, often in a junior position, processes the invoices, puts it into an Excel spreadsheet of some kind and sends it off to a financial employee to sign off on it. It gets signed and submitted and the invoice gets paid. There is little control and understanding regarding the true cost implications. Costs are furthermore broken down on an account level, rather than an actual event level.

The Solution

Telesa automatically collects the invoices and then breaks down every cost component down to its last entity. These entities then go through a 13 step process where the costs are allocated to the correct cost centers. This process includes understanding the services itself in order to allocate it at a service level point of view.

Once the services have been understood, an automated process is started to allocate costs every time it comes in. The cost allocation process now effectively allocates the costs to the cost centres to which they belong.

When using rental usage as an example, that usage can be broken down to supply usage where customers are finding suppliers, inter-branch communication, communication to employees, communication to employees’ families, communication to customers, right onto individual customers. If you are tracking sales to individual customers, you can start allocating the cost of that sale. And then in so doing, understand the true cost of sale as opposed to not allocating all cost components to the cost of sale.

 

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